Northern German cities offer better risk-return profile than Hamburg

Many Northern German B cities are offering a better risk-return profile than their more established counterpart, Hamburg, due to stellar growth in both capital values and rents, according to a study published this month by Wüest Partner Deutschland.

The study, ‘Norddeutsche Wohnungsmärkte: Daten & Perspektiven 2017’ (Northern German residential markets –data and prospects 2017) analyses 15 cities from the states of Lower Saxony, Mecklenburg-Vorpommern, Schleswig-Holstein, Bremen and Hamburg.

Disposal income is growing more quickly than the population and the increasing amount of living space per head means that demand for living space is rising at a disproportionate rate. In addition, the cities’ consistent net migration, coupled with commuters, has also had a positive impact, particularly on the cities of Oldenburg, Osnabrück and Lüneburg, which are expected to benefit from a ‘very positive demographic development’ in the medium term, according to the study. Going forward, the number of inhabitants and their disposal income is also expected to increase in Hannover, Braunschweig, Kiel, Lübeck, Wolfsburg, Rostock, Bremerhaven and Flensburg.

However, construction is failing to keep up with demand, according to Volker Ottenströer, head of the Hamburg region at Wüest Partner Deutschland. ‘In Kiel and Lübeck, for example, only 20% of demand has been met,’ he said. ‘Even in Braunschweig, construction has only kept pace with 25% of demand,' he added.

It is a similar story in Bremen and Hannover, where only 40% of demand is being met by new construction. In Hamburg, that rises to 50%. As a result, vacancy rates have dropped dramatically. Oldenburg und Hamburg have a fluctuating vacancy rate that is less than 1%, the lowest of the cities studied.

Hamburg, for its part, needs around 14,000 new apartments a year to meet demand, compared to 6,000 in Hannover and 3,000 in Bremen. Interestingly, purchase prices are outstripping rental growth – and Hamburg hasn’t been the biggest winner. In the past 10 years, the price of a typical apartment in Wolfsburg has typically risen by 76%, compared to 55% in Braunschweig and 49% in Hamburg. The price for an apartment block has soared by 63% in the period. Rents in the same period have risen on average by 33%.

The price per sqm for an apartment have more than doubled in the past decade in cities such as Oldenburg, Flensburg and Rostock, compared to an increase of 85% in Hamburg, according to the study.

And while Wüest Partner doesn’t currently see a risk of a property bubble, an interest rate hike could lead to a noticeable price correction.

Ultimately, due to the good environment, low vacancy rate and the strong increase in both capital values and rents, apartments in the region can be viewed as a stable investment, offering an average gross return of between 5.3% and 5.9% in cities such as Osnabrück and Braunschweig. For investors willingly to take on more risk in cities such as Wilhelmshaven or Bremerhaven, gross returns can be as high as 7.1% to 8%, according to the study.